Croatian taxation system is ineffective, grey economy flourishes

26 March 2015: National conference “Taxation policies and system, informal economy, and corruption in Croatia” was held on 24 March 2015 in Zagreb, and it was organized by Confederation of Independent Trade Unions of Croatia (SSSH), Independent Croatia Trade Unions (NHS), and the Croatian Association of Workers’ Trade Unions (HURS) within the framework of the regional project “Tackling Taxation, Informal Economy and Corruption in the Western Balkans – towards better governance and democratic process”. Project holders are International Trade Union Confederation (ITUC), Pan European Regional Council (PERC) and Norwegian trade union LO Norway, with the financial support of the government of the Kingdom of Norway.

The Conference was attended by H.E. Henrik Ofstad, Ambassador of the Kingdom of Norway to the Republic of Croatia, Assistant minister of labor and pension system, a representative of Ministry of Finance – Tax Administration, Director of the State Bureau for Statistics, Director of the Association for small and medium enterprises of the Croatian Association of Employers, a representative of the Croatian Chamber of Commerce, leadership of SSSH and NHS, representatives of branch trade unions and experts from SSSH, NHS, and HURS, as well as Martin Hutsebaut – EU expert, and the Project coordinator from ITUC/ PERC Regional Office in Sarajevo.

The participants discussed the national report on the matters of taxation policy, informal economy, and corruption. Mr. Martin Hutsebaut, EU expert, presented comparative analysis of the situation in Croatia, compared to the countries in the region and EU member states.
The analysis of the situation surrounding the taxation system in Croatia, problems of grey economy, and corruption, with a particular focus on the positions of trade unions related to these matters were presented at the national Round table.
Taxation system in Croatia is not sufficiently effective, which is confirmed by the extent of grey economy, based on the analyses by the world leading expert for the area of grey economy: an Austrian Professor of Macroeconomics, Friedrich Schneider, and trade union field study in 2011 suggesting that it is somewhere between 28 and 30,4 percent of GDP, whereby the main burden is borne by the poorest categories of population through consumer taxes. At the same time, property tax goes in favor of the richest categories of population. These facts were highlighted during the Round table on taxation system and grey economy, held on Tuesday in Zagreb.

Trade unions against the tax evaders and single (flat) tax rate

Representatives of the Croatian trade union centers supported the view of the European Trade Union Confederation that the tax evasion should be reduced, and rigorous acting in enforcing sanctions against tax evaders. They also proposed the introduction of taxes on banking extra profit, while they oppose to the introduction of a single tax rate (so-called flat tax). President of Independent Croatian Trade Unions Krešimir Sever pointed out that the grey economy successfully spread everywhere during the crisis, is this is the most suitable ground for misusing people who are jobless and have no financial means necessary for survival. It is so much obvious in civil construction, although somewhat less now due to the reduced extent of business, then in tourism, catering services, and some other economic activities.
SSSH president, Mladen Novosel, pointed out that the grey economy is present in certain sectors, that the salaries are paid without paying the contributions, and discussed the reasons for which the workers accept to work in the area of unregistered work or in grey economy. Taxation policy should be fairer so as to encourage regular tax payment. SSSH has also in previous periods conducted several campaigns against the unregistered work, which produced positive outcomes.
Grey economy flourishes due to high unemployment and companies subjected to the enforcement procedure, as it abuses their difficult situation, Sever says. Secretary General of the Confederation of Independent Trade Unions of Croatia, Boris Feis, advised that the share of grey economy in Croatia is somewhat bigger than in other EU member states. Grey economy is not good for economy or the state in general, or for people, and therefore the trade unions argue that everyone should pay tax, as this is the foundation of every society and functioning of public services, and that the taxation system should be fairer, Feis pointed out. We have the highest VAT rate, 25%, and two thirds of revenues are collected through VAT and various forms of excise duties, while the capital tax rates are below average. To that end, Feis mentioned that there are 221 individual with the property worth more than 27 million euro in Croatia.
Katarina Rumora, Legal advisor in NHS, showed through her presentation about grey economy what the workers think about working in grey economy, and pointed out at the reasons why they work in grey economy, as well as all undertaken measures against this phenomenon, and then she presented the recommendations of trade unions related to fight against grey economy.
Assistant minister of labor and pension system, Marina Kasunić Peris, stated that the share of grey economy is around 30,4 percent of GDP, of which two thirds apply to the unregistered work.

European Commission asks for measures to suppress “unregistered” work

That is the reason why European Commission asked Croatia last year to enforce measures aimed at suppression of unregistered work. The measures, undertaken until today through the amendments to the Labor law and Law on pension insurance have produced positive effects, given that the Report of the State Bureau of Statistics suggests the significant decline in the number of “unregistered” workers. In addition to the labor relations without labor contract, the unregistered overtime was also observed, as well as improperly maintained time sheets, payment of salary in hand or unpaid salaries, Kasunić Peris stated.
Director of the State Bureau for Statistics, Marko Krištof, believes that the realistic share of grey economy in Croatia is around 10 percent, and also that this is not a standard grey economy but rather the so-called unregistered economy that is not included in the comprehensive statistical analyses. His opinion is that the statement of 28-30 percent of grey economy is unreliable, given that this result is obtained through application of the so-called econometric methods. He announced that the State Bureau for Statistics will in late May or in early June publish new assessment of grey economy, which will also include the effects of fiscalization.
In course of the panel discussion, the representatives of state institutions emphasized the measures and ways to suppress grey economy, within the framework of their competencies. Representatives of the Association of employers, Chamber of Commerce, and Chamber of Entrepreneurs shared their position on detrimental effects of grey economy on market position of their members, who comply with the legal requirements in performing their economic activity. It was also emphasized that although World Bank ranked the Croatian taxation system among the best 30 in the world, Croatian economy cannot materialize it due to systemic problems and deficiency in stability of the taxation system. It was then highlighted in conclusions that social partners may get better results related to the protection of their interests in this area if a social dialog is improved, primarily bipartite.
The Round table was extremely well covered in media. Internet portals, daily newspapers, Radio and TV stations reported about it, and we would like to mention that the prime time news of national television also reported about the event.